The Moderating Effects of Independent Directors’ Human Capital on the Relationship between Related Party Transactions and Firm Performance: Evidence from Malaysia

Hamezah Md Nor, Ku Nor Izah Ku Ismail

Abstract

ABSTRACT

The purpose of this study is to examine the effect of related party transactions (RPTs) on firm performance and whether this effect is moderated by independent directors’ (INEDs) presence and their human capital (i.e. functional and firm-specific knowledge). Based on a sample of 300 non-financial firms listed on Bursa Malaysia for 2013, this study found that RPTs in general, have a positive effect on firm performance and this effect varies according to the parties involved in RPTs. Specifically, this study found that firm performance is higher for RPTs involving subsidiaries, associates and joint ventures. The findings support the efficient transactions hypothesis that RPTs can create value to the firm. INEDs’ presence and INEDs’ functional and firm-specific knowledge are found not to have any moderating effects on the RPTs-firm performance relationship. Therefore, the agency, resource dependence and human capital theories that stress on the importance of INEDs as corporate monitor and advisor are not supported. This study, perhaps the first, explains the interaction effects of INEDs’ functional and firm-specific knowledge on RPTs-firm performance relationship.

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